Reproduced from Year 5, Issue #26 of Spirito di Vino Asia...
As the size of China's upper-middle-class is about to explode, luxury marketing is a more interesting model to adapt strategies for the wine industry in China
Until recently consumption patterns in China were influenced by what people needed, not what they wanted. Consumers have focused on necessities so that today, wine consumption in China is largely a tool. A medium to build or to maintain “Guanxi” which loosely translates as a network of connections built through careful nurturing of relationships, often through entertaining and, as importantly, gifting. In such a context, the higher the prestige of the entertainment or the gift offered, the more the amount of face a host can convey to his guests.
As disposable income rises, consumption shifts from needs to wants. However, in the short – to mid- term, pragmatism remains. In China, wine is not seen as a necessity but as a luxury. Therefore, I believe that the correct wine marketing approach in China is akin to that of luxury marketing.
The aim of a panel discussion moderated by Spirito diVino at Wine2Wine, recently held in Verona, was to study successful Italian luxury brands in China and to draw lessons applicable to the wine industry. Over one hour in the Auditorium Verdi of Veronafiere with more than 100 participants in the audience, Giovanni del Vecchio (CEO, Giorgetti), Stefano Ricci (CEO Stefano Ricci), Salvatore Ferragamo (CEO, Il Borro), Franz Botré (Editor in Chief, Spirito diVino), and myself reviewed important statistics and shared our respective experiences in China. This article outlines its most important findings.
China is in flux, today more than ever, as it sees rapid urbanization, the exponential rise in disposable income, a flurry of China policy changes and, the explosive growth of internet usage. Of this confusion, two factors will shape its immediate future. First, its economic growth is forecasted to continue growing at 6-7% per year. Second, the dramatic rise of its upper-middle and affluent classes is predicted to double from now until 2020.
In fact, the upper middle class is key to China’s future and will become the engine of consumer spending. However, these consumers will have nothing to do with today’s consumers. They will be sophisticated, discerning and demanding. And thus, they will be willing to pay a premium for quality. This, in turn, will provide fertile ground to stimulate rapid growth in luxury goods consumption and overseas travels.
By 2022, the size of the upper middle class in China will be 54% of its urban households, from 14% today. It will be seven times larger than Japan and eight times larger than Germany. China’s affluent class with a disposable income above 34k per year will be the world’s 4th largest, after the USA, UK, and Japan. These numbers show that China’s middle class is yet to come of age and be considered at par with western counterparts. When it will match those of developed countries – and this is not too far away - the numbers will be staggering. In fact, from now until 2020, there will be three forces at play in China. First, upward mobility, the growth of the upper-middle and affluent classes will see the consumption of small luxuries, products they want versus to those they need, grow by 17% annually. Second, a generational shift, those from 18 to 35 years are more motivated to spend and their consumption is expected to increase by 14% annually. And, third, growth of e-commerce, even as online retail sales are already the highest in the world (15% of private consumption is online today), it is projected to surge by 20% annually to 2020.
Even as the current middle class has not reached its full potential, China is already the largest consumer of luxury products in the world. In 2015, Chinese global share of personal luxury goods consumption was 31%. Key factors for this dominant position are that the number of very wealthy people has increased by 20% per year since 2000. This affluent class in China has a natural tendency to trade up. There is a high purchase power of women and a rapidly changing lifestyle from a rural to an urban context. Finally, gifting is an extremely important cultural characteristic in China as it is intimately linked to building “Guanxi.” Even so, the situation is far from saturation.
What is interesting is that in 2015 only 20% of total luxury purchases by Chinese were actually in China. Until now, most Chinese purchased luxury items in Europe or the USA where price differential is often in the order of 20-30%. The savings often justify traveling abroad with the results that Chinese travel like never before. In 2015 they will have made 94M trips overseas.
In the last five years, the profile of luxury buyers slightly changed. The “middle-class aspirants,” those in the upper-middle and affluent classes, have taken an increasing share of luxury consumption while the share of core luxury buyers has slightly decreased. This suggests that future growth of luxury consumption will sit squarely with the middle-class aspirants and by 2020, they are expected to be the majority of luxury consumers. These consumers will be infrequent luxury buyers but the total size of the market will be enormous, and they will be buyers of small luxuries like premium and super premium wine.
This has important implications for strategy. The winning formula in China will be to market wine as a luxury item, an affordable luxury targeted to the upper-middle and affluent classes.
The characteristics of current luxury consumers are that they are young (75% are below 45 years), well traveled, sophisticated and, well educated. They spend more time on the internet and outside their home and increasingly seek for new experiences. They have a great sense of financial security. But most Importantly, they remain pragmatic; they seek functionality first and foremost. They see luxury as an investment in that the product must generate a return – tangible or intangible. They trade-up only on items that generate emotional benefits, help demonstrate their status and display their sophistication. In fact, there is enormous peer pressure in China with 80% of them buying luxury for face. As such, luxury is considered a tool for business to convey their social and economic climb. They are therefore willing to pay more if the product is perceived as helping them achieve their goals of displaying status and obtaining social recognition.
During the panel discussion, Giovanni del Vecchio, the CEO of Giorgetti, the manufacturer of luxury furniture, discussed how the company approaches China. With several boutiques in China, it is located not only in Beijing and Shanghai but also in 2nd and 3rd tier cities such as Qingdao. In each, they have built strong relationships with separate importers managed by young, trendy and dynamic teams. At its participation to the 1st Salone del Mobile Shanghai in November 2016, del Vecchio said that the purpose of its booth was to generate emotions with the emphasis on its unique approach to design. With the help of a multimedia presentation using several maxi video walls, it illustrated its architectural philosophy and metaphorically gave the public an experience as they entered the world of Giorgetti. In Guangzhou, it has created an atelier where the magic of its contemporary “Made in Italy” designs is on display as a “home theater” to give customers the full experience of a fully furnished apartment with Giorgetti’s furniture. Giovanni del Vecchio emphasized that one of the keys to success in China is to create magic surrounding the brand to build strong positive association with the product.
Stefano Ricci told us how he opened its first store in Shanghai in 1994 and has since opened 12 more throughout China with a focus on 2nd and 3rd tier cities where the growth of luxury consumption is set to increase at the most rapid pace in the next several years. With its own management team in China, he focuses on the creation of exclusive experience through shops fitted with materials from Italy and a private club at its flagship store in Shanghai where customers and enjoy intimate and exclusive events and pampering. He made emphasized the need to maintain close relationships with clients and to, as much as possible, customize products according to their wishes such as embellishing ties with crystals. Ricci gave us the example of how he has designed several limited-edition pieces unique to China with emblems and symbols that are relevant to its culture. His winning formula, he said, is on rare and precious materials with sophisticated details and exclusive prints with the greatest care for details.
Salvatore Ferragamo related how the fashion house owned by his family chose Shanghai and not Florence, to celebrate its 80th anniversary in 2008, by recreating its Palazzo Spini Feroni on the banks of the Huang Pu river and hosting a fashion show and 2 performances by ballet dancer Roberto Bolle, all lit by Murano glass chandelier and staged against walls frescoed in Florentine style. He remembered how the star-studded occasion received much positive attention and helped the brand consolidate its position in the market. Ferragamo told us that in 2015, it celebrated its 20-year anniversary in China by re-opening its fully refurbished flagship store in Shanghai with an exhibition event showcasing the luxury’s house 100-years ties to the world of cinema. The event included celebrity and VIP guests with a cocktail and a dinner. The exhibition included a Chinese element juxtaposing exclusively commissioned Chinese works of arts with each of its iconic shoes. Ferragamo emphasized that consumer events have high return on investment in China and help not only to give customers the experience of the brand but also build enormous prestige capital for it. The Chinese travel market is also a major focus for Ferragamo with points of sales in 4 of China’s busiest airports and he himself at Il Borro Relais et Chateaux in Tuscany, where he is now the CEO, has organized Chinese delegations of Government officials to visit and meet Tuscan official for a cultural exchange and build relationships.
At the end of the discussion, Franz Botré concluded that to tackle the China wine market, marketers must reinforce their unique value proposition in a way similar to luxury marketing by focusing on image, craftsmanship, unique provenance and, outmost attention to quality. They must address consumer emotional motivations regarding status and their need for return on investment. The key is to create magic and to offer a memorable experience to generate a powerful and positive attitude towards the brand of the winery. By capturing the imagination of younger consumers through clear brand stories which emphasize prestige and quality, they must demonstrate how their brand can be a mean of self-expression and generate social status.
At this point, we must forget what we think we know about China and we must adjust our paradigms. China will look dramatically different in 5-10 years in comparison to what it looks now thanks to the explosive growth in its upper-middle and affluent classes. Future consumers will be discerning and sophisticated, but they will remain pragmatic. They will be willing to pay a premium for products that offer clear return on their investments. In that context, luxury marketing is a more interesting model to adapt marketing strategies for the wine industry in China.